Needles and Haystacks

What most frustrates angel investors is the “needle in the haystack” nature of picking winners.

The frustration is trebled because the “traditional” investing options these days are so profoundly unattractive.

The U.S. public stock market long-term woes would be comical if they weren’t so tragic.

We are now well-beyond 13 long years of ZERO public market returns, with major indices (Dow, S & P, and NASDAQ) trading, on an inflation adjusted basis, much lower than they were in July 1999.

As for that other traditional pillar for the individual investor – residential real estate – its woes are similarly deep.

While prices have seen a moderate recovery this year, since 2007 residential real estate investments have largely reverted back to being long-term depreciating - and not appreciating - assets.

Most Americans, in fact, have gotten so discouraged by both markets’ performances and the media’s incessant “end is near” blaring that they have simply taken the “un-approach” to investing.

They just leave their money in cash – mostly in zero or close to zero interest checking and savings accounts.

Now, what is most perplexing and intriguing about this investment depression it that it has coincided with what has unquestionably been the greatest period in history for technology innovation and human progress.

So how do we square these – a period of historically unprecedented innovation tied to one of historically abysmal investing return?

And more importantly for the pragmatists, how do we profit from it?

To the first question, I would point to three main factors – continued payback for the 80’s and 90’s, globalization, and governmental intervention.

For the U.S. public markets at least, the last 13 years have represented a “reset” of values that had gotten way ahead of themselves in the 80’s and 90’s.

Remember, from August 1982 to July 1999, the Dow Jones Industrial Average went from 777 to 11,031, and the NASDAQ from 159 to 2,685.

Just too much too fast, and after this 16-year great bull market we have now had a 13 year pause.

As for globalization, in this context it is the idea that wealth growth in this period has not so much been paused as it has simply moved from the U.S. and the “West” to the “BIC” – Brazil, India, and China and their brethren.

To the degree that this is true, my view is that it is a short-term “ripple” that is clouding the longer-term reality that all of this great, new global wealth will soon find its way back to the U.S. in the form of increasing exports of American goods and services (especially services).

Thirdly, and perhaps most distressingly, has been the “double whammy” of U.S. governmental intervention in the markets.

And more subtly but far more insidiously, by “uncertainty signaling” regarding tax and regulatory policy which has slowed entrepreneurs from taking the kind of assertive, forward action and risks that they could and would if they felt more comfortable regarding the rules of the game.

So what to do?

Well, if history has taught us anything, it has taught us that in the long run innovation always wins.

And, in spite of its challenges, the U.S. economy and society still produce by far the most and the best innovators in the world.

Find and back these innovators and you will be just fine – BIC, government, and the ups and downs of the markets notwithstanding.

As for who these innovators are? Just keep it simple.

As opposed to thinking of them as technologists, just think of them as good business people.

Peter Drucker defined them best many years ago simply as “Effective Executives.”

They are those that:

1. Ask, “What needs to be done?”

2. Ask, “What is right for the enterprise?” (as opposed to an individual or a specific stakeholder)

3. That develop action plans.

4. That take responsibility for decisions.

5. That take responsibility for communication.

6. That focus on opportunities rather than problems.

7. That run productive meetings.

8. And that think and say “we” rather than “I”

Find these effective executives in whatever line of business they may be in and BACK THEM.